Finding a quality rental property, whether commercial or residential, can be tedious and time-consuming. This might be caused by the broad range of choices available, price, or the quality of these rental properties being different. So, what should you do to find the perfect rental property?
If this is your concern, we’ve got you covered. Here are some tips that you should consider when searching for your next rental property:
1. Work With an Experienced Buyer Broker
There is no reason not to. It won’t cost you anything. In fact, it will save you from making costly mistakes. They do this day in and day out. They do not get paid until you get what you want. They are on your side. Listing agents are solely responsible to the seller, not matter what they tell you.
2. Closely Examine The Local Rental Regulations
Before you even buy a rental property, you need to familiarize yourself with the local rental regulations. But to do this, it’s best to have help from reliable and licensed professionals, such as those you can find at Rooftop Real Estate Management. This is especially important if this is your first time purchasing a rental property. Doing this entails going through the tenant security deposits, laws and regulations for property registration, rent control, evictions, tenant security deposits, and a lot more.
After understanding the local rental regulations, you’ll be more than capable of running a successful rental property venture while simultaneously avoiding any legal disagreements.
3. Make Sure To Separate Your Business And Personal Finances
One common error many new rental property owners make is investing personal funds into the business venture. However, this isn’t advisable as it opens you up to the possibility of your personal money being used to settle your business liabilities.
Moreover, mixing up your business and personal finances might also result in tax complications, further complicating your investment into the business.
4. Place The Down Payment
When investing in a rental property, you need to determine how much down payment you’ll be required to pay. This value is typically between 20 to 30% of the property’s value, and you can get its financing either through a personal loan or bank financing.
When saving for the down payment, here are some useful tips that’ll enable you to have the money in the required timeline;
- Getting a second job.
- Reducing your rent.
- Open an automatic savings deposit.
- Cutting off unnecessary living expenses.
- Settling all present debts.
5. Have A Long-Term Investing Strategy
Real estate is a long-term investment. Therefore, to guarantee its success, you need to approach this venture with a long-term strategy. The best way you can attain this is by putting a particular goal and devoting a lot more time to fully understand the real estate market. As you do this, it’s essential always to be realistic and to base your expectations on your financial capabilities.
Here are a couple of useful questions that can help you develop a long-term investment strategy:
- Should you buy multiple rental properties?
- How much should you pay for the rental property?
- What property types and investment strategies should you consider?
- Does the real estate investment tie-up with your retirement plan?
Once you answer all these questions, you’ll be in a great position to put in place a great plan to purchase the rental property.
6. Be Wary of High-Interest Rates
If you take out a loan to buy your first real estate property, it’s wise to be cautious of the high-interest rate charged by lenders. Usually, this rate lies between 5% to 7.5%, which is much higher than the mortgage rate.
Lenders usually do this since you’re far more likely to default on this payment, unlike with your home. Therefore, the higher the interest rate compensates for, the greater risk they’re taking.
7. Ask Other Landlords for Advice
In any business venture, you choose to partake in, seeking advice from those already experienced in the industry is essential. This means that as you look for a real estate property, make sure to consult other landlords to get useful insights from their past experiences. As you do this, also take into account their investment bias, that is, the landlord’s purchasing strategy, experiences, and ultimate objective.
By talking to other landlords, you also get useful advice on how to identify hood tenants, which is a crucial skill for your peace of mind as a property owner. Another alternative to get these useful insights is to become a member of a local landlord association. With guidance from other experienced landlords, you’ll be able to avoid mistakes. For example, you get to understand why hiring a property management company is recommended.
8. Budget for Vacancies
A rental property won’t always have tenants. This means there are months when one or several units are vacant, which will cost you money. Therefore, as you search for the ideal rental property, make sure not to overlook this factor.
The vacancy rates differ from one market to another. Low-demand rental properties have a greater vacancy rate of more than 20%, while that of the highly demanded areas is less than 2%. With that said, it’s always advisable to consult with other landlords in the area to get a rough estimate of the vacancy rate. By doing this, you’ll be able to determine whether the investment in a specific rental property is worthwhile.
9. Identify Your Property Expenses
One thing that’s standard across all rental property investments is that they accrue expenses over time. These expenses can either be monthly or annually, but you should also be well prepared for an unexpected expense that might occur.
The possible expenses you might need to settle are:
- Unforeseen and anticipated maintenance and repair expenses.
- Property taxes that are owed to the state, which depends on the county, town, or state the rental property is found.
10. Calculate The Margin
Setting the margin rate of return is vital since it determines whether you’ll generate the desired profit. You need to set the margin rate at 10% and set the maintenance cost at around 1% of the property’s value. This means for a property valued at $500,000, the maintenance cost should be $5,000.
In addition, you need to consider other expenses such as possible property taxes, monthly expenses, including janitorial, landscaping and pest control, as well as homeowner’s association fees.
11. Examine If There Are Short-Term Rental Restrictions
The increased popularity of short-term property rentals for residential properties has seen some neighborhoods putting in place short-term rental restrictions. For example, some homeowner’s associations put in restrictions that forbid the rental of houses for less than 30 days. Therefore, you should confirm whether there are such restrictions on a property you’re planning to buy.
12. Get an Inspection
You must never overlook the significance of an inspection. Making sure the property is inspected is essential as it saves you money and time since you get to identify if there are any issues with the property. If you already purchased the property without getting it inspected, this leaves you with a huge loss that can amount to thousands of dollars.
Therefore, make sure the rental property is inspected before you make the purchase. If any issues are detected, this improves your bargaining power since you’ll need to do the repairs independently. Alternatively, you can ask the current owners to do the repairs before making the purchase.
13. Get Pre-Qualified
If you want to get a better picture of the property that you want to invest in, pre-qualification is more than necessary. But for you to get pre-qualified, you need to know several aspects, including the following:
- Ensure a low debt to income ratio.
- Have liquid cash to pay the down payment.
- Have a credit score that’s at least 680, but a score of 740 or higher is better.
- Access to cash that can settle at least six months’ expenses.
14. Look Into The Neighborhood
Even after finding the perfect rental property, you need to make sure to confirm that it’s located in an ideal neighborhood. This means considering essential factors such as the rental property’s access to public transportation, crime rates, and available amenities.
You should buy the rental property once you’re satisfied that it’s in excellent condition and also the neighborhood it’s located in.
15. Make Sure Your Credit Is In Check
When searching for your next rental property, your credit rating is crucial. If you’ve got a great credit score, you enjoy a better negotiating power and higher chances of getting access to credit needed to finance buying the rental property.
In contrast, if you don’t have a great credit rating, you’ll find it a lot harder to find a great rental property since the lenders won’t be willing to offer you the needed finance. Therefore, you’ll need to finance the property’s purchase either using your savings or having to pay high-interest rates if one lender is willing to take the risk with you.
16. Calculate The Property’s Operating Expenses
Knowing the operating expenses is crucial as this will also guide you to determine how much rent should be paid for each unit. In most cases, the operating expenses range between 35% to 80% of the total operating income. This means that if the total rental income paid by your tenants is $5,000, your monthly operating expenses should be approximately $2,000.
The search for an appropriate rental property is never easy. However, after reading this article, you now know some useful tips to consider that’ll help you find the perfect rental property to generate additional income.
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